ISM: Factory Growth Slower Than Expected

Growth in the U.S. factory sector slipped more than expected in May to its slowest pace in nearly two years, raising concerns about the strength of the U.S. economy, the Institute for Supply Management (search) said Wednesday.

The ISM said its index of national manufacturing activity fell to 51.4 in May from April's 53.3. Analysts on average had predicted the index to come in at 52.1.

A reading above 50 denotes expansion in manufacturing.

"The ISM index is still showing growth and that's probably the most important thing," said Patrick Fearon, senior economist, A.G. Edwards and Sons in St. Louis.

May marked the 24th straight month that the ISM index had been above 50, the longest such streak in 16 years. However, the latest reading is the lowest since June 2003, when it was at 50.4.

The latest drop in the index is probably not enough to prevent the Federal Reserve (search) from raising short-term U.S. rates further in the rest of 2005, Fearon said.

The bond market rallied on the weak ISM report. Benchmark Treasury 10-year yields fell to 3.91 percent, the lowest since April 2004.

The index's employment component fell to 48.8 in May from April's 52.3, which suggests that manufacturers are hiring fewer workers and could affect the May nonfarm payroll report due on Friday. Other sub-indices like new orders, production, backlog orders and export orders also fell in May.